Multiple Borrowing

among Microfinance Clients

A Survey of the Literature
July 29, 2010
 Key Questions

1. Why should we care?

2. What do we know?
3. What can we know?
 Why should we care?
• On one hand:
o Households may need multiple sources of credit
o Households may be perfectly able to manage their
finances
o On the other hand:
o Multiple loans may reflect “cyclical debt”
o Households may be unable to service their debt
o Multiple borrowing may lead to rising levels of
delinquency and default
 The words we use…
Multiple borrowing =
“Over-indebtedness”
“Over-borrowing”
“Multiple indebtedness”
“Loan recycling”
“Client poaching”
“Loan pushing”
“Credit pollution”
“Over-supply of loans"
 The words we use…

…reflect our judgments about

• the cause(s) of multiple borrowing
• (MFI side)
• client poaching
• loan pushing
• (client side)
• loan recycling
• the consequences of multiple borrowing
• over-indebtedness
 What do we know?
• Multiple borrowing in other countries
o Bangladesh
o Bolivia
o Bosnia and Herzegovina
o India
o Morocco
o Nicaragua
o Pakistan
 What do we know?
• The few studies that exist employ various…
1) …data collection strategies
o Consolidated MFI data
o Aggregate data
o Individual-level data
o Qualitative approaches (e.g., “oral testimony”)
2) …and analytical approaches
o Case studies
o Descriptive statistics
o Econometric techniques
 What do we know?
• The incidence of multiple borrowing: examples
Country Year Incidence
Bolivia 2000 24
Bosnia and Herzegovina 2009 40
India (unnamed state) 2006 7
Morocco 2009 29
Nicaragua 2009 40
Pakistan 2009 21
Source: Chen and others (2010); Vogelgesang (2003); Krishnaswamy (2007)
Incidence: Percent of borrowers with loans from more than one MFI
 What do we know?
• The drivers of multiple borrowing
o Collective behavior and tolerance for multiple
borrowing
o The role of economic shocks (health shocks)
o “Risk-coping” versus “risk-prevention”
o Lower-interest loans to repay other loans
o Investment needs and existing average loan size
 What do we know?
• The consequences of multiple borrowing:
repayment behavior, default
• Mixed evidence: examples
o India: multiple borrowers perform as well as single
borrowers
o Bangladesh and Bolivia: multiple borrowers have a higher
likelihood of irregular payment, default
• Characteristics differ and may help explain
outcomes
• Context matters: worsening in crisis years
 What can we (not) know?
• Some conceptual difficulties
o Credibility of household-level information: How
reliable are self-reported levels of indebtedness?
o The unit of measurement: How do we treat
individuals in the same household?
o The sources of multiple loans: Should we include
both formal and informal sources of finance?
 What can we (not) know?
• The same observed outcome may reflect
different underlying developments
Household is • Unable to meet
in financial repayment
distress obligations
Default
Household is • Chooses not to repay
selected obligations, with no
not in financial impact on future ability to
distress borrow
 What can we (not) know?
• The same observed outcome may reflect
different underlying developments
Rising • Meets obligations but
financial with rising difficulty
distress
At risk of
Rising financial • Meets obligations default
through “loan recycling”
distress

Occasional • Seasonal difficulties in

financial meeting obligations
distress
 What can we know?
• Some possible strategies
• Pooling MFI information and comparing with
households’ self-reported level of indebtedness
• (Static) Profile of borrowers with multiple loans
• Consumption and investment behavior
• Labor market activity
• Repayment behavior
• (Dynamic) Changes over time
• The drivers of multiple borrowing
• The impact on repayment behavior